Tillys Inc (TLYS) 2015 Q1 法說會逐字稿

Good day, and welcome to the Tilly's, Incorporated first-quarter fiscal 2015 results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Anne Rakunas at ICR. Please go ahead, ma?am.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly's first-quarter fiscal 2015 earnings results. On today's call are Daniel Griesemer, President and CEO, and Jennifer Ehrhardt, outgoing CFO. We're also joined by Michael Henry who recently joined Tilly's as our incoming Chief Financial Officer.

A copy of today's press release is available in the investor relations section of Tilly's website at tillys.com. Shortly after we end this call, a recording of the call will be available for a replay for 30 days in the investor relations section of the Company's website.

I'd like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis only as of today, and actual results may differ materially from current expectations, based on a number of factors affecting Tilly's business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first-quarter 2015 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

As for today's call, we have a limit of one hour, so when we get to the Q&A portion, please limit yourself to one question at a time, to give others the opportunity to also have their questions addressed.

And with that, I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer. Dan?

Thank you, Anne, and good afternoon, everyone. Thank you for joining us today.

During my discussion, I will provide you with an overview of our first-quarter results, and share with you the continued progress we are making on our key initiatives. Then Jennifer will review our financial results in more detail, and provide our outlook for the second quarter of FY15. I'll provide a few closing comments, and then we'll open up the call for your questions.

Before continuing, I'd like to welcome Michael Henry to the Tilly's team. Mike will take over the CFO reins from Jennifer Ehrhardt over the coming weeks, and brings significant and relevant public company and specialty retail experience in senior financial roles.

I'd like to also thank Jennifer for her contributions, and support her decision to move closer to family. During her time at Tilly's, she has further developed our finance and accounting team, and I am confident that Mike has very capable support in his new role as CFO, and I appreciate that Jennifer is staying on during this time, to ensure a smooth transition.

Now let's turn to a review of our first-quarter results. Our first-quarter performance demonstrates that we progressed in our efforts to increase sales and profitability despite further weakness in traffic, especially in the post-Easter period.

During the quarter, we achieved net sales growth of 8.1% and comparable store sales growth of 2%. These results were driven by our relevant action sports-inspired lifestyle merchandise, continued improved response to our marketing initiatives, our improved digital capabilities, and strong performance of our new stores opened in fiscal 2014.

Strength in regular price sales, our planned promotional strategy, and disciplined inventory management drove expanded product margins, and an overall gross profit margin increase of 180 basis points.

I am pleased with how we continued to manage our inventory to ensure a constant flow of newness and excitement, while at the same time, exiting the first quarter with clean inventory.

Our inventory composition reflects the implementation of certain low risk key merchandise initiatives and opportunistic buys for summer and the back-to-school season, and increased inventory to support the planned growth in our e-commerce business.

Overall, we delivered diluted earnings per share of $0.05, a significant increase over the first quarter of last year. We also ended the quarter with a debt-free balance sheet, and cash and marketable securities of over $79 million, a 51% increase over the prior-year period.

During the quarter, we continued to advance our three key initiatives, and I'd like to update you on each of these now. As it relates to our first initiative, increased product differentiation and innovation, increases in conversion and average transaction value support that our product offering continues to resonate well with our customer.

During the quarter, we invested in dominant on trend products and categories, including more products and brands that are new, unique, or exclusive to Tilly's.

I'm pleased with the performance of brand extensions such as Nike SB and Ray-Ban, and new brand like Catch Surf. We also introduced exclusive products from brands such as LRG, Neff, Element, Rook, and Electric, and several new or exclusive collaborations, including offerings from Converse, Hurley, O'Neill, and Billabong.

Turning to our digital platform, during the quarter, we continued to use our new digital platform and our Tilly's Hookup loyalty program, two key elements of our digital initiative, to further build the Tilly's brand through customer awareness and loyalty.

We are making further investments in the digital team with key talent, and have begun to implement various enhancements to our marketing and execution under our digital strategy.

These efforts are contributing to further improvement in our e-commerce business during the first quarter, and to date. And I am pleased with the growth of the Tilly's Hookup as we continue to experience significant sign-ups.

In terms of our real estate strategy, we opened two new stores in the first quarter, and ended the quarter with 213 stores. As a group, our new stores opened in 2014 continue to perform well, and in line with our store economic model, validating our long-term objectives.

We also made progress on our plans to refresh at least 25 existing stores in our fleet, to further improve comps and profitability, by elevating the customer experience. Although early, I'm pleased with the initial results of the stores refreshed to date.

And now, I'd like to turn the call over to Jennifer for more detail on our financial performance in the quarter, and to provide our second-quarter fiscal 2015 outlook. Jennifer?

Thank you, Dan, and good afternoon, everyone.

Turning to our first-quarter performance, net sales rose 8.1% to $120.2 million, compared to $111.1 million in the first quarter of 2014. Comparable store sales, which include e-commerce sales, increased by 2%, compared to the same period in 2014.

During the quarter, all categories delivered positive comps, and we experienced increases in conversion and average transaction value, partially offset by lower traffic. Gross profit increased 15.3% to $36.1 million, or 30% of net sales, compared to 28.2% of net sales in the first quarter of 2014, representing an increase of approximately 180 basis points.

This improvement was due equally to increased product margins and leverage on buying, distribution, and occupancy costs, as a percentage of sales and a favorable rent adjustment related to prior years.

Selling, general and administrative expenses were $33.9 million, or 28.2% of net sales, compared to an SG&A rate of 27.2% in the first quarter of 2014. Operating income was $2.1 million compared to operating income of $1.1 million in the first quarter of 2014.

Our operating margin as a percentage of sales improved approximately 80 basis points in the first quarter of 2015, driven by higher gross profit, partially offset by higher SG&A costs as a percentage of sales.

Net income was $1.3 million, or $0.05 per diluted share, based on the weighted average diluted share count of 28.3 million shares, and an effective tax rate of approximately 40%.

This compares to net income in the first quarter of 2014 of $0.6 million, or $0.02 per diluted share, based on a weighted average diluted share count of 28.2 million shares, and an effective tax rate of approximately 45%, reflecting a discrete item related to stock option forfeitures.

Turning to the balance sheet, we ended the quarter with cash and marketable securities of $79.2 million, a 51% increase over the first quarter of last year. We had no borrowings or no debt outstanding under our revolving credit facility at the end of the quarter.

Cash used for capital expenditures during the quarter totaled $5.1 million, compared to $7.9 million in the first quarter of 2014, and was primarily related to new stores and refreshes.

Inventory totaled $61.7 million at the end of the quarter, up approximately 10% on a per square foot basis, compared to a decline of 5% in the prior year.

As Dan mentioned, our inventory composition is clean, and also reflects the implementation of certain lower risk key merchandise initiatives, and opportunistic buys for the summer and back to school seasons, and increased inventory to support the planned growth in our e-commerce business.

We expect a similar increase in inventory per square foot at the end of the second quarter compared to the end of the second quarter of 2014, as we continue to fund these key merchandise initiatives and planned e-commerce growth.

Now turning to our outlook for the second quarter of fiscal 2015. Since Easter, we've been experiencing much weaker traffic and softness in sales in our key heritage markets, which may be driven by poor weather.

Factoring in these trends, we expect second-quarter comparable store sales to be in the range of a decline of 2% to an increase of 2%, and net income per diluted share to be in the range of $0.01 to $0.05 per diluted share. This assumes an anticipated effective tax rate of approximately 40%, and a weighted average diluted share count of 28.5 million shares.

Second-quarter 2014 net income per diluted share was $0.05, based on a weighted average diluted share count of 28 million shares, and a tax rate of 46%, reflecting a discrete item related to stock option forfeitures.

We continue to expect fiscal 2015 capital expenditures to be between $23 million to $26 million, compared to approximately $24 million in fiscal 2014. The majority relates to the opening of at least 15 new stores during the year, at least 25 refreshes of our existing stores, as well as investments to further improve capabilities across our digital channels, as we have discussed.

Now, I'd like to turn the call back over to Dan for some closing remarks. Dan?

Thanks, Jennifer.

Our first-quarter results were a good start to the year, and I'm pleased with the progress we continue to make to advance our strategic initiatives. Our differentiated and relevant product offering resonated well with our customer, we generated healthy product margins, and we exited the quarter with clean inventory, as we adhered to our pricing and promotional plans.

Although we've seen softness in traffic trends since Easter and into May, we believe we have made the right investments in inventory, and have the right marketing and promotional strategies in place to achieve our objectives we have set for ourselves this year, and in the long term.

I'd now like to open up the call for your questions. Operator?

(Operator Instructions)

Neely Tamminga, Piper Jaffray.

This is Kayla Berg on for Neely. (technical difficulty) I know you guys (technical issues) improved productivity perspective --.

Kayla, I'm sorry. We cannot understand you. You're breaking up quite a bit. I'm sorry.

Can you hear me better now?

Yes. That's a little bit better. Yes.

So as you guys anniversary your e-commerce fulfillment center, what are you seeing from an improved productivity perspective?

Kayla, yes, we are starting to see some improved productivity. What we've talked about in the past is we look to see more productivity as we get later into the year.

We -- if you recall last year, we just opened that facility in May. So we're just now anniversarying the move to that facility, which, of course, resulted in transition costs and the like.

Thank you.

Betty Chen, Mizuho Securities.

Best of luck to Jen. We enjoyed working with you and welcome to Mike.

I was wondering, Dan, if you can talk a little bit about your thoughts regarding traffic trends since Easter, why perhaps that softened a little bit? And then I guess in terms of the inventory, certainly makes sense to be investing behind some of those key categories in digital.

Can you share with us any more color regarding how the website e-commerce is trending, so we can better understand the inventory positions to support that business? Thanks.

Sure. Sure.

So traffic trends, and the business unfolded with actually February being a little bit better than our overall performance, the March/April time period being just slightly below our quarter performance, and it really was a pronounced softening of the business in our heritage markets.

We're actually seeing our other markets and our e-commerce business continue to strengthen, but we have such a large concentration in our heritage markets, that's why we think it could be related to weather. But we don't want to be too much playing the weather card, which is why we have kind of incorporated a little bit wider range than normal for the quarter.

In regards to inventory investments, we've been very encouraged by the e-commerce business growth, particularly in the latter part of the quarter and that has continued into the second quarter. Some of that growth is being funded by inventory investments where we are trying to further expand the assortment, but it's also from various operational executions and things that we're doing there.

But there's also been some opportunistic buys, bringing in receipts, it's more of a timing issue and I would expect within another couple of weeks, we'd be at a more normalized rate of increase on a per square foot basis as we begin building inventory for back to school.

They were the right things to do for the long term, so we have made the decision to bring them in, and not worry about that quarter BOM.

So we're in good shape. The inventory is clean, current, and well-positioned for the balance of the summer season, as well as building for back to school.

Okay. That's great. Another follow-up if I could. In terms of the first quarter, SG&A was up about 100 basis points or so. It sounds like a lot of it from these investments you mentioned earlier. How should we think about SG&A in the second quarter? Should we expect a similar magnitude of deleverage, given most likely those investment buckets will continue?

Yes. You should, in the second quarter, continue to expect a similar amount of deleverage as you saw in the first quarter related to that, and not only at some of the investments that we are making we have talked about in the past, but also when we came out with Q4 earnings and Q1 guidance, we also talked a bit about minimum wage increases that will continue to pressure our store payroll for the first half of this year, as well as if we continue to operate at these levels, certain other incentive accruals that we would have.

Okay. Great. Thank you so much. Best of luck for the quarter.

Dave King, ROTH Capital.

Following up to Betty's question a little bit, so it sounds like in terms of the operating margin guidance that's implied for the second quarter, a lot of that's on the investment side.

Any thoughts then, and I haven't plugged it in yet, but any thoughts then in terms of gross margin? And then as I'm thinking about gross margin, Jennifer, are you able to quantify what the rent adjustment was this quarter?

Yes, Dave.

When you look at overall gross profit, what we did in Q1 of 180 basis points of improvement, we mentioned 90 basis points was due to product margin improvement on better regular price selling, lower markdowns. The other 90 basis points was due to buying distribution and occupancy. And of that, it's about a third that related to the rent adjustment.

Okay. That helps there.

And then as you think about that then for the second quarter, and how we should be thinking about margins? Gross margins?

When you think about it for the second quarter, product margin as we've always done in the past, we continue to remain very focused on delivering strong product margins.

To the magnitude of what we saw in Q1, I wouldn't sign up for that. I think you can expect that we?d continue to see modest increases that we've seen in the past outside of Q1.

And then also just, you would expect your normal leverage that you typically get on buying distribution and occupancy. Wouldn't expect additional -- that was a one-time rent adjustment.

Okay. That's helpful. Thank you and good luck.

Jeff Van Sinderen, B. Riley.

Did you guys break out what your e-commerce same-store sales or e-commerce comps were?

No. And we're not really doing that as it's -- we have talked about this before, Jeff, it's really a pretty seamless and fluid experience between all channels.

But what we have seen is that the e-commerce business, while it began building as early as third quarter of last year has continued to build in its contribution and performance in the first quarter, and on into the second.

So it's very healthy, very encouraging about the product offering, and the things that we're doing there to improve that business.

Okay good to hear.

Maybe you can just talk a little bit more about the I guess magnitude of difference you are seeing in the heritage markets versus some of your newer markets? I know you mentioned weather, are you just thinking that has to do with it maybe being cooler in California versus warmer in the Northeast than some other areas, or any other color you can share there?

Yes.

Not a lot other than, we did talk about heritage markets being drivers of some of the stronger business in fourth quarter, and was the case in the early part of the first quarter.

We have seen some cooler weather than normal, cooler and wetter than normal, that seems to have affected those stores, but nothing other than that. It's just kind of a flip, but if you look at overall business response to our marketing efforts, conversion, average dollar of sales, the strength of the e-commerce business and the strength of the business in other markets, we're still very confident about our goals for this year, and for the long term.

Okay. So if traffic is running a little bit more challenging, I guess, two questions there. One, do you do something to try to spur traffic in the near-term? Or do you stick to your guns on margins, or do you get a little more promotional? Do you take more markdowns now? Just wondering how you are thinking about that.

Well, we'll do what we need to do with the inventory to address any overhang of summer product, to make sure we keep our inventory clean and current, but that's all built into our assumptions about the performance in the quarter, and the composition of our inventory, as we exit the second quarter.

We have seen strong response to our marketing efforts, both traditional as well as some of the digital efforts we've been doing, so you could expect us to continue to invest in that, in an effort to try to take advantage of that improved response.

But you will not see us turning to a significant promotional position on this. We are very comfortable with where our inventory is and where it will be, and the initiatives we have in place to drive profitable growth.

Got it. Best of luck for the rest of the quarter.

Okay. Thanks.

Liz Pierce, Brean Capital.

Nice job, you guys. Jennifer, we'll miss you, and Mike, welcome.

Great to catch up with you, look forward to catching up with you, it's been a while. So I was curious on your Hookup program, the loyalty program, where -- is it coming from both online as well as in-store? Is something that you guys track?

Yes. It is. The majority of our business still comes from stores, so the majority of the customers sign-ups are coming from stores, but it is very vibrant in both stores and online.

Okay. And then, I'm sorry -- did you want to say something?

No.

And what about on the port? Any issues there? I don't believe you mentioned anything.

No. We said it didn't really have -- it had a small effect, but not really material enough for us to call out in the first quarter. That's still the case, and we don't see really any impact in the second quarter at all.

Okay. And then my final question is on the catalog, what's your thoughts for as we go to the back-to-school season? Is it going to match one for one?

Yes. We have two very powerful books that we drop. That's traditional. We been doing that now for several years, and we're constantly looking at what makes sense there. But you should expect us to continue to use that as a driver of the business.

Is that two books per quarter, per season? Or because I think I got -- .

So it all depends on the back to school timing and when we would put those in-home. We're not sharing any of those plans at this point, but essentially for the back-to-school season, which does bridge a couple of quarters there, you would expect us to do what we've done in the past.

Okay. All right. Thanks and best of luck.

Richard Jaffe, Stifel.

Thanks very much, guys.

Based on the geography that you have seen, or the challenges with your local geography, wondering how that might affect your new store plans? It sounds like the new stores and new markets are doing better than the heritage markets, at least since the Easter holiday. So wondering if there's some more color you could add to that geographically?

Thank you.

Yes. I don't think that what we're viewing that's going on in the latter part of the first quarter or in the beginning of second quarter is something fundamental or structural. The stores in our heritage markets continue to be very high volume, and a strong driver of profit for the Company.

We?ll continue to make decisions on the real estate side that make the most sense for the long term, only opening stories that make absolute sense, regardless of where those are. So we'll be very opportunistic, but being very judicious, as well.

Thank you.

Sharon Zackfia, William Blair.

A couple of follow up questions. On the opportunistic buys this quarter, are there any ramifications there in terms of product margin?

No. These are -- we tried to frame it in a way to make sure that everyone understood these are lower risk, not fashion things. They were the right things to do and not worry about a quarter date that would flag a number.

It's the right thing to do for the business, so we will continue to make those decisions. We're just calling it out, that they were investments that needed to be made, and the timing was the timing.

Okay.

And then, on the minimum wage, I'm assuming that the big bulk for you was with California minimum wage, with the back half of last year. So can you talk through from an SG&A cadence standpoint, I assume the second half of the year the rate of growth will be lesser.

And then can you talk about, I know this is out a while, but the next minimum wage increase in California at the beginning of 2016, whether the order of magnitude of impact is greater or lesser than what we saw this last time around?

Sharon, we can expect, you are correct California, is the biggest magnitude there, although we do have other states that we have increased the minimum wage.

When you get to the back half post July, we should start seeing a little bit more minimal rate, because we will be up against the same as last year.

And as you said, in January of 2016 there will be another increase that will likely have -- I would expect a similar magnitude of that for again, that would be for the full year.

Jennifer, do you have what your average hourly wage is at this point?

That?s something we wouldn't share.

Okay. Okay. Great. Thank you.

Dave King, ROTH Capital.

Thanks for taking my follow-up.

I guess I was curious, in terms of the store refreshes, I know you said it's early, Dan. I guess I was just curious about, in terms of initial reads there, I think they're at about two-thirds of the investment of a new store.

Any thoughts on the contribution in terms of stores that you've already done it with, in terms of increased productivity. Anything you can share there, is that at, above, or below, how is that trending versus what you guys initially thought?

Thanks.

Yes. Thank you.

We are -- it's very early, as you acknowledge, some of them are just a few weeks old so it's very early to call, but we are encouraged by the response, the customer response, the better and more engaging and more relevant customer experience that they create, and are encouraged by the initial results. So that's far as we can go now, but we'll look for further updates as the year progresses.

Okay. Thank you.

Thank you.

Jeff Van Sinderen, B. Riley.

Just had a follow-up. I'm just wondering if you could provide any more color on differences that you saw in the various segments of the business. In other words, men's, women's, kids, product areas, that thing. Maybe call out any weaknesses or strengths there.

And also, did that change at all after Easter? Did you see a shift in what was working after Easter? Thanks.

Yes. That's another indication to us that we think it's more temporary than structural. The -- all businesses were positive comped in the first quarter across the board, none negative and no significant outliers one way or another.

So we are very encouraged again about the balance and stability of the business and the broad-based nature of the relevance of the product, and no meaningful callouts here, as we have seen slightly softer business in the post-Easter and early May.

It appears we have no further questions at this time. Mr. Griesemer, I'd like to turn the conference back to you for any additional or closing remarks.

Okay, thanks again for joining us, and we look forward to discussing our second-quarter results with all of you in August. Have a good evening.

Thank you.

This does conclude today's presentation. We thank you for your participation.